[header date=”5 March 2019″]Facebook dips into digital currency, Quadriga’s pockets are empty, and ether issuance slows down.[/header]
What’s happened so far? Mark Zuckerberg wants in on crypto. The New York Times confirmed last week that Facebook plans to introduce a digital coin for WhatsApp, one of its messaging platforms, sometime in the next year. Bloomberg first reported the possibility in late December. It appears the coin will be used for international money transfers to India, at least initially, though wider use could come later.
How would it work? Facebook’s coin could be pegged to a mix of government-backed currencies, making it more like a redeemable token than an unbacked crypto like bitcoin. The price of Facebook’s potential coin is unclear, but in the crypto community, tokens that aim to avoid the volatility that has plagued bitcoin often use some sort of real world equivalency as a peg.
For instance, Gemini, a cryptocurrency exchange run by Zuckerberg’s nemeses, Cameron and Tyler Winklevoss, introduced the Gemini Dollar, a tradable token pegged to the US dollar. The Gemini Dollar trades on the ethereum network, a public computing platform.
Of course, if Facebook introduces a single coin that tracks a basket of currencies, that would be a new twist and somewhat divorced from our current conceptions of money.
Is the crypto part of this really necessary? Probably not, especially since it’s not clear whether Facebook would cede control over the digital currency. Calling it crypto is an easy marketing angle and whatever the case, Facebook‘s involvement in banking would be a huge deal, even without a crypto component.
Who would use Facebook’s coin? Given that Facebook has more than 2.5 billion users across its various platforms, its new coin could quickly find an enormous following, especially in places that lack conventional banks and financial institutions.
Facebook is well positioned to shake up the multi-billion dollar remittance industry. The company could deploy its cash reserves to reduce the often-high cost of transferring money, especially in the developing world. It might sound outlandish today, but for people who lack reliable banking systems, Facebook’s coin could become a viable option for financial management.
Is this bad for bitcoin? No, bitcoiners shouldn’t worry. Facebook’s digital coin would offer a fundamentally different value proposition. Bitcoin caters to an anarchist segment of society), whereas Facebook’s coin would be decidedly mainstream. Attention might bleed over and actually improve bitcoin’s standing and price. If Facebook’s coin is listed on crypto exchanges alongside bitcoin, it could amplify global demand for the older token.
Should I invest in Facebook coins? Let’s not get ahead of ourselves. The company hasn’t even officially confirmed the digital currency. Anyway, getting caught up in whether Facebook’s coin is a worthwhile investment is besides the point. If the coin is pegged to government-backed currencies, as is suspected, it would be no better than holding a bunch of different currencies (e.g., the euro, the peso, the rupee). Also, arbitrage should wipe quickly away any differences between the price of Facebook’s tokens and their real world equivalents.
What’s the biggest challenge Facebook might encounter? Beyond the technical feats required to create a globally useable digital currency, it’s unclear whether the crypto exchange ecosystem is mature enough to support truly massive trading volumes. Think of every coffee and sandwich purchase that happens every day, and multiply that across billions of people in dozens of countries. Verifying customer identities and processing millions of transactions could prove challenging for Facebook and any companies or exchanges that offer support.
Developers shrink block rewards. In ethereum’s recent, albeit delayed, round of network updates known as Constantinople and St. Petersburg, developers reduced the mining reward—the payout for processing transactions—from three ether to two ether. In dollar terms, that means each block that is mine now nets about $250, plus any fees paid by users (it used to be about $420). Blocks are being mined roughly once every 13 seconds, but even before the planned reduction, calculations show mining is hardly profitable for individuals.
Cutting ether issuance reduces the coin’s inflation rate from 7.5% to approximately 4.5%—a move intended to prevent the price of the coin from eroding due to oversupply. At a high level, if miners are generating and selling fewer new coins, then the price of ether could rise in the near term, all else equal. Of course, many factors, including trade between ether and other cryptocurrencies, also play a role in the coin’s price and liquidity.
Ethereum implemented its last major network update, Byzantium, in Oct. 2017, just a few months before the cryptocurrency market reached its boiling point. Ether briefly traded for more than $1400 in Jan. 2018. Today, one ether is worth just $127, a 91% drop. For ether investors, inflation seems to be the least of their concerns.
[supplemental headline=”Hacks, scams, and capers”]
Quadriga’s cold wallets have been empty for months. You may remember hearing about the Canadian cryptocurrency exchange whose founder, Gerald Cotten, reportedly passed away from complications of Crohn’s disease. Upon his death, the exchange was thrust into chaos, as only Cotten possessed the passwords and private keys required to access nearly $140 million worth of cryptocurrency owed to customers.
In the latest twist, Ernst & Young, the court-appointed monitor, revealed the accounts which supposedly contained Quadriga’s frozen funds, are actually empty—and have been empty since April 2018, eight months before Cotten died at age 30.
Setting aside the intrigue and speculation about what actually happened, there’s an irony
in the situation. Cryptocurrencies, like bitcoin, are supposed to be easily traceable because all transactions are posted on a public ledger. Transparency is one of their major advantages, at least in theory. However, the Quadriga debacle shows transactions on exchanges and transactions on the public ledger might not add up. Ultimately, the public ledger is what customers should examine to discover the truth, and to ensure that their crypto custodians are behaving properly.
At the moment, the circumstances of Cotten’s untimely passing—and his unusual activity leading up to it—read like a laundry list of conspiracy theory evidence. Although Cotten is believed to have died in early December, while honeymooning in India with his wife of one month, his death was not made public until January. Less than two weeks before his death, Cotten updated his will, leaving his fortune to his new spouse—as well as $100,000 to his chihuahuas (subscription).
Please send news, tips, and chihuahua beneficiaries to firstname.lastname@example.org. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. Perfect numbers, like perfect men, are very rare.